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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Will the money be there when you need it? If you don't need a certain amount of money for seven to ten years, you can afford the risk because if it goes down, it has time to recover. Welcome to the Retire On Time podcast. My name is Mike Decker here with David Fransen. As always, this show is about answering your questions, your retirement questions.
Mike:Text them to (913) 363-1234. And remember, this is just a show, not financial advice. David, what do we got today?
David:Hey, Mike. If you are two to five years from retirement, is it wise to keep investing in growth?
Mike:So to define growth, to make sure
Mike:we're on the same page, growth means higher risk, not necessarily high risk. And when I say risk, it's not like you're, I don't know, slacklining or tightrope walking between two different buildings. Right? Risk is
David:a relatively risky term
Mike:for finance, but it means you've got higher risk or higher growth potential. You're trying to accumulate assets. But when you approach retirement, typically, the conventional wisdom would be to lower that risk. Now I think that's a very insightful question because it's it's very nuanced in that, well, what do you do if you don't want to take excessive amounts of risk? So let me give an example.
Mike:If we were in 2018 and you were to say, Mike, I want take less risk. I'd say, okay. What does this look like? What what's your timeline? Are you before retirement?
Mike:Are we not gonna retire soon? Is the assets for legacy? You kind of have to define the money, but the conventional wisdom would say, we'll put in bond funds.
David:Alright.
Mike:Well, hear me out. Here's the pitch
David:Okay.
Mike:For 2018. K. Bond funds are historically low. They're not paying very well. Interest rates are historically low.
Mike:They're not paying very, very well. K? And you're gonna put 40 to 60% of your assets in something that historically has maybe averaged one to three percent, at least over the last ten to fifteen years or so. That's a pretty crappy place to put your money. Now, it gets worse.
Mike:If if interest rates, not necessarily the Fed, but if the bond yield of new issuers, so new bonds coming to market, are offering a better rate than the bonds that you have, your bonds lose value. Not actually the value if you hold it to maturity, but if you wanted to trade them early like a bond fund would because they'd actively trade the, you know, the the the the the fund itself. Right? They're actively trading bonds back and forth in every which way. Those go down in value.
Mike:So this is why in 2022 and 2023, bond funds lost money. They're not principal protected. A bond is principal protected. A bond fund is not principal protected because inflation got out of control. Interest rates spiked.
Mike:I mean, we just jacked those things up. The ten year treasury increased. They it all increased, and so your bond funds were losing value. And that's the typical first, hey, let's put your assets in some bond funds to have less risk.
David:Yeah. Okay. That's the conventional wisdom.
Mike:Well, it look. I'll use an example. Last night, my wife and I, we made beef and broccoli. Okay. There's a weird ingredient there.
Mike:It's kind of a weird analogy, but fish oil. Have you ever kept with fish oil? It's disgusting.
David:I've taken the fish oil pills. Is that the same thing?
Mike:No. Whether fish sauce, fish oil. I don't know. When you cook Asian food Oh, yeah. Many times the acid in the meal is fish oil.
Mike:And by itself, it's disgusting.
David:Yeah. I have a bottle of that in my fridge. It's been there a long time.
Mike:It's probably thrown away if it's expired.
David:Yeah. I bet so.
Mike:Does it expire? Maybe it's maybe it's purchased expired. I don't know. But
David:Doesn't smell good.
Mike:When you blend it with the right things and you're in the right mood for the right dish, it works really, really well. When you have it on its own, it's terrible. When you blend it with the wrong things, it doesn't do very, very well. My point in this very off the cuff analogy is bond funds are just a thing. There are seasons when it might make sense to have it a part of your portfolio, and there are seasons where it might be a riskier than you realize part of your portfolio, not risk in the conventional wisdom, but just it's bad timing.
Mike:I mean, have you ever, like like, you survey everyone, hey. What do you want for dinner? You want something? Everyone wants something totally different. Yeah.
Mike:Go there, and it's just like, you know, it's Yeah. That's how I feel about bond funds. And right now, in my opinion, we are at bond fund risk. So people are saying, let's put I think Vanguard had recently said, like, let's put 60 to 80% of your assets in bond funds. The markets could get rocky.
Mike:I agree with the sentiment that the markets could get pretty rocky. I agree that when you see that the stock market's at an all time high, the S and P's at all time high, Dow Jones, Nasdaq, they're all at all time highs. Gold and silver, all time highs. Everything's an all time high right now.
David:Uh-huh. Seems like it.
Mike:Okay. Where do we go from here?
David:Yeah.
Mike:There's probably a correction or a crash near. Typically, when that happens, they'll drop interest rates. Bond funds would would offset that or stabilize the market crash. But there are other instruments you can do that you can use. If Trump gets his way with a new chairman, new Fed chairman dropping interest rates near 1%, bond funds might not be competitive anymore.
Mike:Again, it's that analogy of you don't really want the thing. You're not in the mood for something that's not really gonna grow very, very well. And so this is where you have to take a portfolio and then dissect it based on time frames. So what money do you need when? You need x amount of money for the for let's see.
Mike:Let's say two years you retire. And in two years, you're gonna need this much money for for income for the next five years. Maybe instead of bond funds to try and just ride out whatever happens, and it could end up into a a crappy situation, maybe you're doing fixed investments or products, like a couple of CDs or treasuries or bonds, not bond funds, but bonds because you're you're buying them and holding them until maturity, or like a MYGA if you're of the retirement age. MYGA is a multi year guaranteed annuity. It's basically a CD from insurance company.
Mike:And maybe you ladder out that part of your portfolio for that, so it's not really at risk. You're lowering your overall portfolio risk by solving your income needs for that specific time, giving your other growth assets more time to recover if the markets crash. You don't need to touch it for as long of a time. Risk is is a time question, in my opinion.
David:Okay.
Mike:Because the the question is, will the money be there when you need it? If you need money next year and you put it all in the market, you're at risk of the markets dropping when you need it. If you don't need a certain amount of money for seven to ten years, you can afford the risk that you're taking because if it goes down, it has time to recover. Is this making sense?
David:Yeah. So for a lot of really young people who are decades away from retirement, they kind of they can invest in kind of whatever. Right? Because they have time to recover. Yeah.
David:So if you're in retirement or nearing retirement or I'm sorry. If you're in it or yeah. Or nearing it.
Mike:Or if you're near you wanna you wanna derisk yourself.
David:Mhmm.
Mike:What you don't wanna do is you don't wanna take income from an account that's lost money. Yeah. That's why you're shoring up you're you're basically you're you're protecting part of your assets so you don't accentuate your losses. This is called sequence of returns risk. Whoever came up with that name needs to go to marketing school and figure out a better name for it because it sucks.
Mike:It makes no sense. Sequence of returns risk. Okay. Well, there's always a sequence of return. Why is this a risk?
Mike:And it basically says if the sequence every year of the return, if if the sequence is is not favorable, it's gonna hurt you. If it is favorable, it will help you. So it's not really a risk, it's an awareness.
David:Yeah. So yeah. Can you illustrate that?
Mike:Or So if if markets then well, here, I'll I'll use this analogy.
David:Okay.
Mike:We're gonna do a sequence, and we're just gonna do two two numbers. Okay?
David:Does this analogy involve fish oil at all? No. Okay. Alright. Darn it.
Mike:Yeah. We'll get maybe maybe we'll bring that back.
David:Okay.
Mike:And going fishing somehow. Yeah. So if if you have a $100,000, for example, k, or a million dollars, whatever number you wanna put in there, a $100,000, okay, and we experience a 50% gain, we're thinking, wow. This is this is incredible. Right?
Mike:So 50% gain, a 100,000, we're at a 150,000. Right? And then a 30 correction, you're at a 105,000.
David:You average 10% Which sounds great. Right?
Mike:Between the two years Yeah. But your cash only increased by around, what, two and a half percent each year? So the sequence of the return is deceptive if you look at just the percentages, but it's because of the volatility or the big swings that distorted that. Okay? So and then you could flip it.
Mike:You can say, well, you know, we're all at growth. We'll eventually recover blah blah blah. If have a 30% crash at the beginning, 50 recovery, that's a pretty sweet deal. But the 50% growth is based on less dollars because a 100,000 goes down to 70,000, and then it increases by 50%, you're at a 105,000 anyway. It's the same thing.
Mike:So these big swings, we've had a lot of big upswings. When are we gonna get the downswings? No one knows. And so it's not about being greedy, it's about saying, hey, I'm getting close to retirement. I need the money to be here.
David:So I can't I can't have those big swings right now because I gotta take income.
Mike:You need to stabilize the expected performance of your portfolio. So there you can get on Excel and have some fun with this, by the way. You can you can do all sorts of things like look at the S and P, let's say, 2000 to 2010 as an example, or you can do 1966 to 1976 or 1929 to 1945. These are flat markets, for example. And you can look at the sequence of the returns and see how the cash value moves around and then if you pull income out.
Mike:These are fun projects you can do in Excel just by yourself. But what's interesting is if you see if you have, like, ten years of bigger swings versus ten years of more, like, four, five, 6% and it stays in that range, your cash value typically does better in the four, five, six more predictable range than swinging for the fences but striking out sometimes. So the point being is the sequence or the swings are gonna matter. A reason why when you retire, you wanna shore up some of the risk is not necessarily to go to bond funds, but it's to create more predictability on the returns of the part of your portfolio that will provide you income for the first five to ten years of your retirement.
David:Yeah. That makes sense.
Mike:So had someone actually come in this week, and it was 9092% of his assets were in equities or stocks. Mhmm.
David:K? That seems high.
Mike:And he said, well, my adviser said he was coming over. My adviser said that I should be should be on equities. And I said, well, that's a very confusing thing, and here's why. Your adviser is probably right in that bond funds were gonna lose money. So in that sense, that that's a that's a smart thing.
Mike:Right? You don't wanna put your assets in something that's at high risk, like a bond fund back in 2022, 2023. But instead of shoring up in other less risky asset classes, he just said, you might as well just stay in growth. So he got the first half right, but in my opinion, he missed the second half. What are some of the options here?
Mike:CDs, treasuries, high yield savings, money markets, those are kind of the the easier ones to understand. You've got fixed or fixed indexed annuities. You've got buffered ETFs. You can put all of these other some structured notes could qualify for this. You may decide to diversify out of the stock market, out of the bond market, and maybe include, like, a privately traded REIT that can generate some income if you wanted that way.
Mike:There there are other ways you can lower your risk and diversify in different asset classes or types of instruments to accomplish the goal. But generally speaking, putting the plan together first so you know your income needs, exploring these strategies, specifically tax strategies that you wanna implement, and then putting together a portfolio so that the money that you need when you need it is available or is taking less risk than the money you don't need for twenty years from now. Because retirement's like a thirty year deal. It's a third of your life.
David:That's wild to think about it that way.
Mike:So don't fall for arbitrary advice. Don't say, Oh, well, rule of 100 says your age is the percentage of assets to be in bond funds. No. Yeah. You're missing the principle being taught.
Mike:So let's not oversimplify it and just say we've got tool tools we can use. There's a massive toolbox that continues to evolve over time that can help you accomplish the goals with more flexibility and, and so on. If you appreciate the content, make sure you like and subscribe, and don't forget to go to retireontime.com to grab a book, the workbook, all of the resources to help you prepare to retire on time. Thanks so much. We'll see you in the next episode.